STEGE SANITARY DISTRICT

Transcription

1 STEGE SANITARY DISTRICT FINANCIAL STATEMENTS AND ACCOMPANYING INFORMATION WITH INDEPENDENT AUDITORS REPORT

2 7500 SCHMIDT LANE EL CERRITO, CALIFORNIA Tel: (510) Fax: (510) BOARD OF DIRECTORS Elected Officials Name Beatrice R. O'Keefe Dwight Merrill Paul Gilbert-Snyder Alan C. Miller Graham Brand Office President Vice President Board Member Board Member Board Member DISTRICT MANAGEMENT Rex W. Delizo District Manager Kary Richardson Administrative Supervisor

3 TABLE OF CONTENTS INDEPENDENT AUDITORS REPORT.. 1 MANAGEMENT S DISCUSSION AND ANALYSIS 3 FINANCIAL STATEMENTS Statement of Net Position June 30, Statement of Revenues, Expenses and Changes in Net Position For the Year Ended June 30, Statement of Cash Flows For the Year Ended June 30, NOTES TO FINANCIAL STATEMENTS 12 SUPPLEMENTARY INFORMATION Comparison of Budget to Actual For the Year Ended June 30, Schedules of Operating Expenses before Depreciation For the Year Ended June 30, PAGE

4 INDEPENDENT AUDITORS' REPORT To the Board of Directors Stege Sanitary District Report on the Financial Statements We have audited the accompanying financial statements of the Stege Sanitary District (the District), as of and for the year ended June 30, 2013, and the related notes to the financial statements, which collectively comprise the District's basic financial statements as listed in the table of contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions Hopyard Road, Suite 335 Pleasanton, CA Tel: Fax: FRESNO LAGUNA HILLS PALO ALTO PLEASANTON RANCHO CUCAMONGA RIVERSIDE SACRAMENTO

5 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Stege Sanitary District as of June 30, 2013, and the changes in financial position and cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America, as well as accounting systems prescribed by the State Controller s office for special districts. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis as listed in the table of contents be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Stege Sanitary District's basic financial statements. The supplementary information is presented for the purpose of additional analysis and is not a required part of the basic financial statements. The supplementary information, as listed in the table of contents, is the responsibility of management and was derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the supplementary information is fairly stated, in all material respects, in relation to the basic financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated December 7, 2013, on our consideration of the District s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. Pleasanton, California December 7,

6 MANAGEMENT S DISCUSSION AND ANALYSIS The following discussion and analysis of the Stege Sanitary District's (District) financial performance provides an overview of the District's financial activities for the fiscal year ended June 30, Please read it in conjunction with the District financial statements FINANCIAL HIGHLIGHTS Current assets decreased by $143,959 or 5.1 percent as a result of this year's operations. Capital assets increased by $805,925, or 2.4 percent. This increase is mainly the result of the annual pipe replacement project. Long-term liabilities decreased by $185,583 or 13.4 percent since debt service payments were paid and no additional loans were taken. Total operating revenues increased by $487,009 over the previous year, or 14.8 percent. This increase is due primarily to the third year of a three year rate increase of sewer service charges that was approved in 2010 to continue its "pay as you go" system for financing both operating and capital programs. Operating expenses decreased by $1,383,778, or 32.7 percent. This large decrease is mainly a result of a onetime prior year adjustment due to a re-evaluation of our sewer collection system replacement cost, which is based on a revised calculation formula. Connection fee revenues increased $10,162, or percent from the previous year. The revenue increase is due to the development of the Natural Grocery Cafe. Other revenues income increased by $39,234 or 12 percent as a result of Prop. 1A funds and insurance dividend funds received. DISTRICT HIGHLIGHTS The District completed another major sewer renewal project in fiscal year and this is represented on financial statements as a conversion of cash to capital assets. This annual project for the cyclical replacement and/or rehabilitation of sewer lines is anticipated to be typical of future ones with an expense of at least $1.4M per year. This may be increased significantly in the future depending upon the details of future discharge permits and orders from regulatory agencies. 3

7 MANAGEMENT S DISCUSSION AND ANALYSIS USING THIS ANNUAL REPORT District financial statements report information about the District use of accounting methods similar to those used by private sector companies. The Statement of Net Position includes all District assets and liabilities, and provides information about the nature and amounts of investments in resources (assets) and obligations to creditors (liabilities). It also provides the basis for computing rate of return; evaluating the capital structure of the District; and assessing the liquidity and financial flexibility of the District. All of the current year's revenues and expenses are accounted for in the Statement of Revenues, Expenses, and Changes in Net Position. This statement measures the success of District operations over the past year and can be used to determine whether the District has successfully recovered all its costs through its user fees and other charges. The final required financial statement is the Statement of Cash Flows. The primary purpose of this statement is to provide information about District cash receipts, cash disbursements and net changes in cash resulting from operations, investing, and capital and noncapital financial activities. It provides answers to questions such as, "Where did the cash come from?", "Cash was used for what purpose?", and "What was the change in cash balance during the reporting period?" FINANCIAL ANALYSIS OF THE DISTRICT One of the most important questions asked about District finances is whether or not the District's overall financial position has improved or deteriorated. The Statement of Net Position and the Statement of Revenues and Expenses and Changes of Net Position report information about District activities in a way that will help answer this question. These two statements report the net position of the District and changes in it. You can think of District net position the difference between assets and liabilities- as one way to measure financial health or financial position. Over time, increases or decreases in District net position are one indicator of whether its financial health is improving or deteriorating. Other factors to consider include changes in economic conditions, population growth, and new or changed legislation. 4

8 MANAGEMENT S DISCUSSION AND ANALYSIS Changes in Net Position District total net position increased from the previous year by $1,148,470, or 3.3 percent, net of the prior period adjustment. (See Note #8 to the financial statements) The following condensed financial statements show net asset position, statement of net position and changes in net position, statement of revenue and expenses and changes in net position, in a comparative format indicating the amount and percentage of change. Table 1 Condensed Statement of Net Position Amount of Percent of Fiscal Year Fiscal Year Increase Increase (Decrease) (Decrease) Current and other assets $ 2,965,156 $ 3,033,178 $ (68,022) -2.2% Capital assets 34,888,770 34,082, , % Total assets 37,853,926 37,116, , % Current liabilities 477, ,769 (137,272) -22.3% Long-term liabilities 1,202,246 1,387,829 (185,583) -13.4% Total liabilities 1,679,743 2,002,598 (322,855) -16.1% Net Position: Net investment in capital assets 33,503,061 32,431,308 1,071, % Restricted - 124,001 (124,001) % Unrestricted 2,758,834 2,558, , % Total net position $ 36,261,895 $ 35,113,425 $ 1,148, % 5

9 MANAGEMENT S DISCUSSION AND ANALYSIS Changes in District net position can be determined by reviewing the following condensed Statement of Revenue, Expenses, and Changes in Net Position. Table 2 Condensed Statement of Revenues, Expenses, and Changes in Net Position Amount of Percent of Fiscal Year Fiscal Year Increase Increase (Decrease) (Decrease) Revenues: Operating Revenues $ 3,771,934 $ 3,284,925 $ 487, % Other revenues 365, ,074 39, % Connection fees 19,582 9,420 10, % Total revenues 4,156,824 3,620, , % Expenses: Operating Expenses 2,843,642 4,227,420 (1,383,778) -32.7% Interest Expenses 40,711 47,655 (6,944) -14.6% Total expenses 2,884,353 4,275,075 (1,390,722) -32.5% Increase (Decrease) in net position 1,272,471 (654,656) 1,927, % Beginning Net Position 35,113,425 35,768,081 (654,656) -1.8% Prior Period Adjustment (Note 8) (124,001) % Ending Net Position $ 36,261,895 $ 35,113,425 $ 1,148, % Revenues Total revenues increased, $536,405 or 14.8 percent compared to the previous fiscal year. Operating revenues increased $487,009, or 14.8 percent from the previous year. The increase in operating revenues was primarily due to the third year of a three year rate increase of sewer service charges that was approved in 2010 to continue its "pay as you go" system for financing both operating and capital programs. Other revenues increased by $39,234, or 12 percent over the previous year. Connection fees increased $10,162, or percent from the previous year. Expenses Operating expenses decreased by $1,383,778, or 32.7 percent in fiscal year compared to fiscal year This large decrease is mainly a result of a onetime adjustment in the prior year due to a re-evaluation of our sewer collection system replacement cost, which is based on a revised calculation formula. 6

10 MANAGEMENT S DISCUSSION AND ANALYSIS Budgetary Highlights The District is not required by statute to adopt a budget; however, in its commitment to fiscal responsibility, the District adopts an annual budget each year which outlines the major elements of forthcoming operations and capital improvements. The District maintains an ongoing capital improvement program which is updated annually at the same time the operating budget is approved. The program includes an ongoing sewer renewal program, whose purpose is to replace and/or rehabilitate aging District sewer main lines that may cause overflows and result in expensive, unplanned repairs. The program, which includes repairs, replacement, rehabilitation and condition assessment, currently costs approximately $1.4 million annually and will be financed on a pay-as-you-go system. CAPITAL ASSET AND DEBT ADMINISTRATION Capital Assets At the end of fiscal year 2013, the District had $34,888,770 (net of accumulated depreciation) invested in a variety of capital assets. The assets included: land; collection system subsurface lines and pump stations; administration building and vehicles. The total increase in District capital assets for the current fiscal year was about $805,924 or 2.4 percent more than last year. The major capital asset event during the fiscal year is completion of a sewer construction project, the "Standard Pipebursting Project". The following table summarizes District capital assets at historical costs for fiscal years ended June 30, 2013, and June 30, 2012: Table 3 Historical Cost Balance at Balance at June 30, 2013 June 30, 2012 Land easements $134,475 $134,475 Subsurface lines, buildings, vehicles/equipment 46,712,668 45,136,929 Total Capital Assets 46,847,143 45,271,404 Accumulated Depreciation (11,958,373) (11,188,559) Total Capital Assets (Net of Depreciation) $ 34,888,770 $ 34,082,845 7

11 MANAGEMENT S DISCUSSION AND ANALYSIS Long Term Liabilities At the end of the current reporting period, the District had $1,197,983 in State revolving fund loans outstanding versus $1,385,710 last year a decrease of $187,727 or 13.5 percent as shown below: Balance at Balance at June 30, 2013 June 30, 2012 Long term debt, net of current portion $ 1,197,983 $ 1,385,710 The District has previously used State revolving fund loans to finance previous sewer upgrade projects. The interest rate on these loans is 50 percent, or one-half, of the rate of the most recent issuance of State general obligation (GO) bonds. ECONOMIC AND OTHER FACTORS The District is governed in part by provisions of the State Water Resources Control Board (SWRCB) that require rate-based revenues that must cover the costs of operation, maintenance and recurring capital replacement (OM&R). The District is not subject to general economic conditions such as increases or declines in property tax values or other types of revenues that vary with economic conditions such as sales taxes. Accordingly, the District sets its rates to its users to cover the costs of OM&R and debt financed capital improvements, plus any increments for known or anticipated changes in program costs. Increases in operating costs have been kept at or below inflationary levels in recent years. Medical premiums have risen dramatically and may continue to do so in the near future. CONTACTING THE DISTRICT'S FINANCIAL MANAGEMENT This financial report is designed to provide our customers and creditors with a general overview of District finances, and demonstrate District accountability for the money it receives. If you have any questions about this report, or need additional financial information, contact the District Manager at 7500 Schmidt Lane, El Cerrito, CA or (510)

12 STATEMENT OF NET POSITION 2013 CURRENT ASSETS Cash and cash equivalents $ 2,837,092 Accounts receivable, net 95,575 Prepaid insurance 32,489 Total current assets 2,965,156 NONCURRENT ASSETS Capital Assets Non depreciable capital assets: Land and easements 134,475 Depreciable assets Sewer lines, building, vehicles and equipment 46,712,668 Less: Accumulated depreciation (11,958,373) Net capital assets 34,888,770 OTHER ASSETS OPEB asset 87,712 Total other assets 87,712 Total non-current assets 34,976,482 TOTAL ASSETS 37,941,638 CURRENT LIABILITIES Accounts payable and accrued expenses 174,710 Accrued payroll and related expenses 7,175 Interest payable 14,497 Current portion of accrued compensated absences 93,389 Current portion of long-term debt 187,726 Total current liabilities 477,497 LONG-TERM LIABILITIES Accrued compensated absences 4,263 Long-term debt, net of current portion 1,197,983 Total long-term liabilities 1,202,246 TOTAL LIABILITIES 1,679,743 NET POSITION Net investment in capital assets 33,503,061 Unrestricted 2,758,834 TOTAL NET POSITION $ 36,261,895 The accompanying notes are an integral part of these financial statements. 9

13 STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET POSITION FOR THE YEAR ENDED 2013 OPERATING REVENUE Sewer service charges $ 3,741,984 Other operating revenues 29,950 Total operating revenue 3,771,934 OPERATING EXPENSES Sewage collection 1,560,662 General and administration 513,166 Depreciation 769,814 Total operating expenses 2,843,642 Operating income 928,292 NON-OPERATING REVENUES (EXPENSES) Interest and investment income 7,203 Interest Expense (40,711) Other Income 358,105 Total non-operating revenue (expense) 324,597 INCOME BEFORE CONTRIBUTED CAPITAL 1,252,889 Connection fees and other contributed capital 19,582 CHANGE IN NET POSITION 1,272,471 Net position, beginning of year 35,113,425 Prior period adjustment (Note 8) (124,001) Beginning net position as restated 34,989,424 NET POSITION, END OF YEAR $ 36,261,895 The accompanying notes are an integral part of these financial statements. 10

14 STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 2013 CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers $ 3,729,038 Payments to suppliers (753,109) Payments to employees and directors (1,359,798) Cash flows provided (used in) by operating activities 1,616,131 CASH FLOWS FROM CAPITAL AND RELATED FINANCIAL ACTIVITIES Principal payments on long-term debt (265,828) Interest paid on long-term debt (43,321) Acquisition and construction of capital assets (1,575,739) Connection fees and other related revenues from developers 19,582 Cash flows provided by (used in) capital and related financing activities (1,865,306) CASH FLOWS FROM INVESTING ACTIVITIES Interest received and investment income received 7,203 Other income 358,105 Cash flows provided by (used in) investing activities 365,308 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 116,133 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,734,498 CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,850,631 RECONCILIATION OF OPERATING INCOME TO NET CASH FROM OPERATING ACTIVITES Operating income $ 928,292 Adjustments to reconcile operating income to cash flows provided by operating activities Depreciation 769,814 (Increase) decrease in accounts receivable and prepaids (41,365) Increase (decrease) in accounts payable and accrued expenses (54,417) (Increase) decrease in other assets 268 Cash flows provided by operating activities $ 1,602,592 The accompanying notes are an integral part of these financial statements. 11

15 NOTES TO THE FINANCIAL STATEMENTS NOTE #1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General The Stege Sanitary District (the "District") was formed in May 1913 and provides a service of sanitary sewage collection to over 40,000 residents in El Cerrito, Kensington, and portions of the Richmond Annex. Treatment and disposal of the sewage is the responsibility of the East Bay Municipal Utility District (EBMUD) which maintains a pumping station on Point Isabel to receive the sewage from the Stege Sanitary District service areas. Reporting Entity For financial reporting purposes, and in conformity with the Governmental Accounting Standards Board (GASB) Codification Section 2100, which defines the governmental entity, the District includes all funds that are controlled by, or are dependent on the Board of Directors of the District. Since no other entities are controlled by, or rely upon the District, the reporting entity consists solely of the District. Fund Accounting Classification The financial statements of the District are presented as those of an enterprise fund under the broad category of funds called proprietary funds. Enterprise funds account for operations that are financed and operated in a manner similar to private business enterprise, where the intent is that the costs (expenses, including depreciation) of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges. The acquisition and capital improvement of the physical plant facilities required to provide these goods and services are financed from existing cash resources, cash flow from operations, the issuances of bonds, and contributed capital. Basis of Accounting Enterprise funds are accounted for using the accrual basis of accounting. Revenues are recognized when they are earned and expenses are recognized when they are incurred. The District applies all applicable GASB pronouncements for certain accounting and financial reporting guidance. In December of 2010, GASB issued GASBS No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements. This statement incorporates pronouncements issued on or before November 30, 1989 into GASB authoritative literature. This includes pronouncements by the Financial Accounting Standards Board (FASB), Accounting Principles Board Opinions (APB), and the Accounting Research Bulletins of the American Institute of Certified Public Accountants' (AICPA) Committee on Accounting Procedure, unless those pronouncements conflict with or contradict with GASB pronouncements. 12

16 NOTES TO THE FINANCIAL STATEMENTS The District distinguishes operating revenues and expenses from non-operating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with the District's principal ongoing operations. The principal operating revenues of the District are charges to customers for sales and services. Operating expenses for the District include the costs of sales and services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. Budgetary Policy and Control The District adopts an operations and maintenance budget at the beginning of each year for the following fiscal year. Capital budgets are adopted on a project basis. Formal budgetary integration is employed as a management control device. Cash and Cash Equivalents The District's cash and cash equivalents are considered to be cash-on-hand, Local Agency Investment Funds, and "Cash in County Treasury". The State Treasurer's Investment Pool operates in accordance with appropriate state laws and regulations. The reported value of the pool is the same as the fair value of the pool shares. Investments for the District are reported at fair value. Property, Plant and Equipment Property, plant and equipment are recorded at historical cost, or estimated historical cost if actual cost is not available. Contributed assets are recorded at estimated fair value on the date contributed. Depreciation is recognized on buildings, furniture, fixtures, equipment, and subsurface lines by the straight-line method over their estimated useful lives. The District uses a minimum cost of $1,500 for equipment, structures, and improvements as the basis for a capital asset and charges to current operations all additions under those cost limits. The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend lives are also expensed in the current period. Property, plant, and equipment assets are depreciated using the straight-line method and estimated useful lives are determined as follows: Sewage Collection Building Vehicles Equipment 75 years 30 years 5-10 years 5-15 years Compensated Absences The District records employees' vacation and sick leave benefits in the period in which they accumulate and become vested. 13

17 NOTES TO THE FINANCIAL STATEMENTS Estimates Management uses estimates and assumptions in preparing the financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities, and the reported revenues and expenses. Accordingly, actual results could differ from those estimates. New Governmental Accounting and Reporting Standards In March 2012, the GASB issued GASB Statement No. 65, Items Previously Reported as Assets and Liabilities. This Statement establishes accounting and financial reporting standards that reclassify, as deferred outflows of resources or deferred inflows of resources, certain items that were previously reported as assets and liabilities and recognizes, as outflows of resources or inflows of resources, certain items that were previously reported as assets and liabilities. This Statement also provides other financial reporting guidance related to the impact of the financial statement elements deferred outflows of resources and deferred inflows of resources, such as changes in the determination of the major fund calculations and limiting the use of the term deferred in financial statement presentations. The provisions of this Statement are effective for financial statements for periods beginning after December 15, Earlier application is encouraged. The District will be required to implement the provisions of this Statement in fiscal year ending June 30, 2014, and is currently evaluating the impact on the financial statements. In March 2012, the GASB issued GASB Statement No. 66, Technical Corrections 2012 an amendment of GASB Statements No. 10 and No. 62. The objective of this Statement is to improve accounting and financial reporting for a governmental financial reporting entity by resolving conflicting guidance that resulted from the issuance of two pronouncements, Statements No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, and No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre- November 30, 1989 FASB and AICPA Pronouncements. This Statement amends Statement No. 10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues, by removing the provision that limits fund-based reporting of an entity s risk financing activities to the general fund and the internal service fund type. As a result, governments should base their decisions about fund type classification on the nature of the activity to be reported, as required in Statement 54 and Statement No. 34, Basic Financial Statements and Management's Discussion and Analysis for State and Local Governments. This Statement also amends Statement 62 by modifying the specific guidance on accounting for (1) operating lease payments that vary from a straight-line basis, (2) the difference between the initial investment (purchase price) and the principal amount of a purchased loan or group of loans, and (3) servicing fees related to mortgage loans that are sold when the stated service fee rate differs significantly from a current (normal) servicing fee rate. These changes clarify how to apply Statement No. 13, Accounting for Operating Leases with Scheduled Rent Increases, and result in guidance that is consistent with the requirements in Statement No. 48, Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future Revenues, respectively. The provisions of this Statement are effective for financial statements for periods beginning after December 15, Earlier application is encouraged. The District will be required to implement the provisions of this Statement in fiscal year ending June 30, 2014, and is currently evaluating the impact on the financial statements. 14

18 NOTES TO THE FINANCIAL STATEMENTS In June 2012, the GASB issued GASB Statement No. 68, Accounting and Financial Reporting for Pensions an amendment of GASB Statement No. 27. This Statement replaces the requirements of Statement No. 27, Accounting for Pensions by State and Local Governmental Employers, as well as the requirements of Statement No. 50, Pension Disclosures, as they relate to pensions that are provided through pension plans administered as trusts or equivalent arrangements (hereafter jointly referred to as trusts) that meet certain criteria. The requirements of Statements 27 and 50 remain applicable for pensions that are not covered by the scope of this Statement. This Statement establishes standards for measuring and recognizing liabilities, deferred outflows of resources, and deferred inflows of resources, and expense/expenditures. For defined benefit pensions, this Statement identifies the methods and assumptions that should be used to project benefit payments, discount projected benefit payments to their actuarial present value, and attribute that present value to periods of employee service. Note disclosure and required supplementary information requirements about pensions also are addressed. Distinctions are made regarding the particular requirements for employers based on the number of employers whose employees are provided with pensions through the pension plan and whether pension obligations and pension plan assets are shared. This Statement is effective for fiscal years beginning after June 15, Earlier application is encouraged. The District will be required to implement the provisions of this Statement in fiscal year ending June 30, 2015, and is currently evaluating the impact on the financial statements. 15

19 NOTES TO THE FINANCIAL STATEMENTS NOTE #2 CAPITAL ASSETS Capital asset activity for the year ended June 30, 2013 is summarized as follows: Balance Balance June 30, 2012 Additions Deletions Transfers June 30, 2013 Capital assets, not being depreciated: Land $ 134,475 $ - $ - $ - $ 134,475 Construction in progress - 1,206,310 - (1,206,310) - Total Capital assets, not being depreciated: 134,475 1,206,310 - (1,206,310) 134,475 Capital assets, being depreciated: Sewage collection facilities 41,336,596 31,099-1,206,310 42,574,005 Buildings and equipment 2,822, ,822,994 Maintenance equipment 402,808 14, ,583 Vehicles 574, , ,086 Total Capital assets, being depreciated: 45,136, ,429-1,206,310 46,712,668 Less: Accumulated depreciation Sewage collection facilities 10,390, , ,982,349 Buildings and equipment 106,480 95, ,129 Maintenance equipment 262,266 41, ,344 Vehicles 429,798 40, ,551 Total Accumulated depreciation: 11,188, , ,958,373 Total capital assets, being depreciated, net 33,948,370 (400,385) - 1,206,310 34,754,295 Total Capital Assets, net $ 34,082,845 $ 805,925 $ - $ - $ 34,888,770 Construction work in progress consists primarily of the direct construction costs associated with numerous District projects plus related construction overhead. 16

20 NOTES TO THE FINANCIAL STATEMENTS NOTE #3 CASH AND INVESTMENTS A. Summary of Cash and Cash Equivalents and Investments Cash and cash equivalents and investments at June 30, 2013 are detailed as follows: 2013 Cash on hand and in financial institutions $ 245,630 Investments 2,591,462 Total Cash and Cash Equivalents $ 2,837,092 The District is authorized under California Government Code to make direct investments in local agency bonds, notes, or warrants within the State; U.S. Treasury instruments; registered State warrants or treasury notes; securities of the U.S. Government, or its agencies; bankers acceptances; commercial paper; certificates of deposit placed with commercial banks and/or savings and loan companies; repurchase or reverse repurchase agreements; medium term corporate notes; shares of beneficial interest issued by diversified management companies, certificates of participation, obligations with first priority security; and collateralized mortgage obligations. B. Authorized Investments by the District Limitations as they relate to interest rate risk, credit risk, and concentration of credit risk are indicated in the schedule below: Maximum Maximum Maximum Authorized Remaining Percentage Investment Investment Type Maturity of Portfolio In One Issuer Local Agency Bonds, Notes, Warrants 5 years None None Registered State Bonds, Notes, Warrants 5 years None None U.S. Treasury Obligations 5 years None None U.S. Agency Obligations (a) 5 years None None Bankers Acceptance (b) 180 days 40% 30% Commercial Paper 270 days 25% 10% Negotiable Certificates of Deposit 5 years 30% None Repurchase Agreements (c) 1 year None None Revrse Repurchase Agreements 92 days 20% of base None Medium Term Notes 5 years 30% None Mutual Funds N/A 20% 10% Money Market Funds N/A 20% 10% Mortgage Pass-through and Asset Backed Securities 5 years 20% None County Pooled Investment Funds N/A None None Local Agency Investment Fund (LAIF) N/A None None Joint Agency Authority Pools N/A None None 17

21 NOTES TO THE FINANCIAL STATEMENTS C. Interest Rate Risk Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer the maturity of an investment, the greater the sensitivity of its fair value to changes in market interest rates. The District manages its exposure to interest rate risk by depositing the majority of its funds with the State Local Agency Investment Fund (LAIF). At June 30, 2013 LAIF had a weighted average maturity of 278 days. Information about the sensitivity of the fair values of the District's investments to market interest rate fluctuation is provided by the following schedule that shows the distribution of the District's investment by maturity: Maturities of 12 months or less LAIF $ 2,591,462 D. Credit Risk Credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measure by the assignment of a rating by a nationally recognized statistical rating organization. LAIF does not have a credit rating. E. Custodial Credit Risk Deposits This is the risk that in the event of a bank failure, the District's deposits may not be returned to it. The District's policy for custodial credit risk, as well as the California Government Code, requires that a financial institution secure deposits by pledging securities in an undivided collateral pool held by a depository regulated under state law. The market value of the pledged securities in the collateral pool must equal at least 110% of the total amount deposited by the public agencies. California law allows financial institutions to secure public deposits by pledging first trust deed mortgage notes having a value of 150% of the secured public deposits and letters of credit issued by the Federal Home Loan Bank of San Francisco having a value of 105% of the secured deposits. As of June 30, 2013, the District's cash deposit at Mechanic's Bank was $269,290 and was covered by federal depository insurance or by collateral held in an undivided collateral pool, as described above (before reduction for outstanding checks). 18

22 NOTES TO THE FINANCIAL STATEMENTS Investments This is the risk that, in the event of the failure of the counterparty transaction, the District will not be able to recover the value of its investments or collateral securities that are in possession of an outside party. It is the District's policy that all securities held, be secured through third-party custody for safekeeping. F. Investments in the State Pool The District is a voluntary participant in the Local Agency Investment Fund (LAIF) that is regulated by California government code Section under the oversight of the Treasurer of the State of California. The fair value of the District's investment in the pool is reported in the accompanying financial statement at amounts based upon the District's pro-rata share of the fair value provided by LAIF for the entire LAIF portfolio (in relation to the amortized cost of that portfolio). The balance available for withdrawal is based on the accounting records maintained by LAIF, which is recorded on the amortized cost basis. NOTE #4 LONG-TERM OBLIGATIONS The District has secured four State Revolving fund loans from the State Water Control Board. Each loan is payable in annual principal and interest payments. Loan C for an original amount of $1,245,773 under agreement dated August 1, 1992, has an interest rate of 3.1 percent and maturity date of April 15, Loan C for an original amount of $1,122,256 under agreement dated October 1, 1993, with an interest rate of 2.9 percent and maturity date of January 31, Loan C for an original amount of $1,586,165 under agreement dated October 2, 2000, has an interest rate of 2.6 percent and maturity date of February 21, Loan C for an original amount of $706,004 under agreement dated June 13, 2006, has an interest rate of 2.4 percent and maturity date of December 21, Long-Term Debt Balance Balance July 1, 2012 Additions Deductions June 30, 2013 Loan C $ 82,960 $ - $ 82,960 $ - Loan C ,343-70,669 72,674 Loan C ,977-80, ,303 Loan C ,257-31, ,732 Total $ 1,651,537 $ - $ 265,828 1,385,709 Less Current Portion (187,726) Long Term Portion $ 1,197,983 Compensated absences $ 90,545 $ 7,107 $ - $ 97,652 Less Current Portion (4,263) Long Term Portion $ 93,389 19

23 NOTES TO THE FINANCIAL STATEMENTS Maturities for the next five years and thereafter on the loans are as follows: Year Ended June 30 Principal Interest Total 2014 $ 187,726 $ 37,847 $ 225, ,979 30, , ,980 27, , ,058 24, , ,214 21, , ,019 54, , ,733 6, ,816 Totals $ 1,385,709 $ 201,374 $ 1,587,083 NOTE #5 PENSION PLAN Plan Description. The District's cost-sharing multiple-employer defined benefit pension plan, (Miscellaneous Plan), provides retirement and disability benefits, annual cost of living adjustments, and death benefits to plan members and beneficiaries. The Miscellaneous Plan is part of the Public Agency portion of the California Public Employees Retirement System (CalPERS), an agent multiple-employer plan administered by CalPERS, which acts as a common investment and administrative agent for participating public employers within the State of California. A menu of benefit provisions as well as other requirements is established by State statues within the Public Employees' Retirement Law. The District selects optional benefit provisions from the benefit menu by contract with CalPERS and adopts those benefits through local ordinance or resolution. CalPERS issues a separate comprehensive annual financial report. Copies of the CalPERS's annual financial report may be obtained from the CalPERS Investment Office, 400 Q Street, Suite E4800, Sacramento, California or via the web at Funding Policy. Active plan members in the Miscellaneous Plan are required to contribute seven percent of their annual covered salary. The District is required to contribute the actuarially determined remaining amounts necessary to fund the benefits for its members. The actuarial methods and assumptions used are those adopted by the CalPERS Board of Administration. The employer contribution rate for fiscal year 2013 was percent. The contribution requirements of the plan members are established by State statute and the employer contribution rate is established and may be amended by CalPERS. Annual Pension Cost. For Fiscal Year 2013, the District's annual pension cost was $170,120 and was equal to the District's required and actual contributions. The required contribution for Fiscal Year 2013 was determined as part of the June 30, 2011 actuarial valuation using the entry age normal actuarial cost method with the contributions determined as a percent of pay. 20

24 NOTES TO THE FINANCIAL STATEMENTS The actuary used following actuarial method and assumption: Valuation date: Actuarial Cost Method Amortization Method: Actuarial Assumption: Investment Rate of Return Projected Salary Increases Inflation June 30, 2011 Entry Age Normal Cost Method Level percentage of payroll 7.75% (net of administrative expenses) 3.55% % percent based on age, service, and type of employment General-3.00% per year Payroll Growth 3.25% Individual Salary Growth A merit scale varying by duration of employment coupled with an assumed annual inflation growth of 3.00% and an annual production growth of 0.25%. Three Year Trend Information for Miscellaneous Plan Three-Year Trend Information Fiscal Year Annual Pension Percentage of APC Net Pension Ending Cost (APC) Contributed Obligation 6/30/2013 $ 170, % $ - 6/30/ , % - 6/30/ , % - NOTE #6 - OTHER RETIREMENT BENEFITS Postemployment Healthcare Plan (OPEB) Plan Description. The District provides post-retirement benefits to eligible employees. Eligibility is based upon active employee status of the District at the time of retirement, completion of at least ten years employment with the District, having achieved the age of 55 or older, eligibility to retire under PERS, and not receiving health care benefits from any other source other than Medicare or workers' compensation. During the fiscal year , the District Resolution established the amount of the employer's contribution of retiree health medical benefit at $280 per month per retired employee. That rate is still in effect for the year ended June 30,

25 NOTES TO THE FINANCIAL STATEMENTS California Public Employees' Retirement System (CalPERS) and the California Employers' Retiree Benefit Fund (CERBT). To comply with recommendation of the Governmental Accounting Standards Board (GASB) statement No. 43 and No. 45, the District joined the CalPERS CERBT fund in fiscal During the year ended June 30, 2013, $2,658 was made to the trust. The purpose of the CalPERS CERBT Fund is to provide California government employers with a trust through which they may prefund retiree medical costs and other post employment benefits. The objective of the Fund is to seek favorable returns that reflect the broad investment performance. The Fund utilizes the concept of diversification through asset allocation. However, there is no guarantee that the Fund will achieve its investment objective. The Employers who participate in the Fund own units of the Fund's portfolio that invests in accordance with the approved strategic asset allocation, they do not have direct ownership of the securities in the portfolio. The Fund's unit value changes with market condition. The CERBT is a self-funded program, in which the participating employers pay the program costs. The cost charged to participating employers is based on the average daily balance of assets. CalPERS issues a separate Comprehensive Annual Financial Report. Copies of the Ca1PERS' annual financial report may be obtained from the CalPERS Executive Office, 400 P Street, Sacramento, CA Funding Policy. Statement No. 45 sets rules for computing the employer's expense for retiree benefits other than pension, called OPEBs. The expense, called the annual OPEB Cost (AOC), is determined similarly to pensions. The annual required contribution (ARC) of the employer, represents a level of funding that, if paid on an ongoing basis, is projected to cover normal annual costs each year and amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed 30 years. When an agency contributes more than the ARC, there is a net OPEB asset; when the contribution is less, a net OPEB obligation results. The District has a net OPEB asset of $87,712 as of June 30, Annual OPEB Cost and Net OPEB Obligation (Asset). For 2013, the District's annual OPEB cost (expense) was $19,900. The District contributed $19,632 for retiree health care premiums (an implied subsidy). The following table shows the components of the District's annual OPEB costs for the 2013, the amount actually contributed to the plan, and changes in the District's net OPEB obligation: 2013 Annual Required Contribution (ARC) $ 19,900 Interest on net OPEB obligation (asset) (1,230) Adjustment to ARC 1,230 Annual OPEB cost 19,900 Contributions made 19,632 Change in net OPEB obligation (asset) 268 OPEB obligation (asset) - beginning of year (87,980) OPEB obligation (asset) - end of year $ (87,712) 22

26 NOTES TO THE FINANCIAL STATEMENTS Trend Information. The District's annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the OPEB obligation for 2013 and the preceding year are presented below: Fiscal Year Annual OPEB Actual Employer Percentage Net OPEB Ending Cost Contributions Contributed Obligation (Asset) 2013 $ 19,900 $ 19,632 99% $ ,070 19, % (87,980) , , % (86,750) Funded Status. The District's actuarial report dated July 1, 2011 estimates an unfunded Actuarial Accrued Liability (UAAL) of $191,100 in order to fund the health medical benefits of retired employees. The funded status of the plan as of July 1, 2011 (most recent available) was as follows: Actuarial UAAL as a Valuation Actuarial Value Actuarial Accrued Unfunded AAL Covered Percentage of Date of Assets Liability (AAL) (UAAL) Funded Ratio Payroll Covered Payroll July 1, 2011 $ 121,300 $ 312,400 $ 191,100 39% $ 808, % Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. The funded status of the plan and the annual required contributions of the employer are subject to continual revision, as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplementary information, presents multiyear trend information that shows whether the actuarial value of the plan assets is increasing or decreasing over time, relative to the actuarial liabilities for benefits. Actuarial Methods and Assumptions. GASB Statement No. 43 requires actuarial reporting by the retiree health benefits trust fund and Statement No. 45 requires that an employer's expense be determined using actuarial methods so that costs accrue over the employees' working lifetimes. In addition, the CERBT trust requires biennial valuation. In order to comply with the above requirements, the Actuarial Analysis of Retiree Health Benefits for the District's, as of July 1, 2011, was performed by enrolled actuary Steven T. Itelson. The actuary used following actuarial method and assumption: Valuation date July 1, 2011 Actuarial cost method Entry Age Normal Cost Method Amortization method Level percentage of payroll Amortization Period 30 Years Asset valuation method Market Value of Assets Actuarial Assumptions: Investment rate of return (funded) 7.50% Salary increase 3.25% Inflation Rate 3% 23